Were the initial sale and public resale of locally printed community-currency bills subject to Utah sales tax?

Plain-English summary

Utah Private Letter Ruling 09-006 concluded that issuing and reselling the proposed community-currency bills was not subject to sales tax.

The Commission treated the bills as intangible property similar to gift cards. The paper had no intrinsic value; it represented purchasing value within a local business network.

The issuer's discounted sale of bills to participating businesses and the businesses' resale of those bills to the public were both nontaxable.

Sales tax applied later when customers used the bills to buy taxable merchandise or services. The tax had to be calculated and remitted in U.S. dollars.

The printer also owed sales or use tax on the materials used to produce the bills.

The proposed local currency

The requester planned to print paper community-currency bills and sell them to local businesses for a percentage of face value, possibly 60 percent.

The businesses would be featured on the bills, use that exposure as advertising, and resell the bills to the public at face value.

Participating businesses would accept the currency as full or partial payment for goods or services.

No organization would be designated to redeem the bills for U.S. dollars, although businesses could resell them to the public.

Why the bills were like gift cards

The Commission characterized both sales of the bills as sales of intangible property.

It reasoned that the physical paper did not have intrinsic value but represented other value, similar to a gift card.

A gift card is not taxed when sold. Instead, the business collects sales tax when the customer uses it to buy taxable goods or services.

The fact that participating businesses were advertised on the bills did not change the classification.

Initial issuance and resale

The issuer's first sale to local businesses was not subject to sales tax.

The local businesses' later sale of the bills to the public also was not subject to sales tax.

The ruling reached the same result even though the issuer sold below face value and the business resold at face value.

Tax when customers spent the bills

Participating businesses had to collect and remit sales tax when customers used the community currency to pay for taxable merchandise or services.

The sales tax had to be calculated and remitted to the Commission based on U.S. dollars, even when the customer paid with the local bills.

Nontaxable underlying purchases remained outside the tax; the currency itself did not decide the taxability of what was bought.

Printer's materials

Although selling the community currency was nontaxable, the materials used to make it were taxable.

The requester, acting as printer, had to pay sales or use tax on the paper and other production materials.

Not legal tender or precious-metal currency

The Commission rejected the claimed legal-tender and precious-metal exemptions in section 59-12-104(51) and (52)(b).

The proposed bills were not U.S. or foreign legal tender and were not qualifying gold, silver, or platinum items.

Their nontaxable treatment instead came from their classification as intangible property similar to gift cards.

Holding

The Commission concluded that:

• The issuer's discounted sale of the bills to participating businesses was not taxable.
• The businesses' resale of the bills to the public was not taxable.
• Tax applied when customers used the bills to buy taxable goods or services.
• Tax collected on those purchases had to be calculated and remitted in U.S. dollars.
• The printer owed sales or use tax on the materials used to produce the bills.
• The legal-tender and precious-metal exemptions did not apply.

What this means for you

Local currency and gift-card programs

Separate the sale of the payment instrument from the later purchase it funds. The instrument sale was nontaxable, while the underlying taxable purchase remained taxable.

Participating retailers

Configure point-of-sale systems to collect tax based on the U.S.-dollar value of taxable purchases paid with local currency.

Printers and issuers

Budget for sales or use tax on production materials even when the finished payment instrument is treated as intangible property.

Common questions

Q: Was the issuer's sale of community-currency bills taxable?

A: No. The Commission treated the bills as intangible property similar to gift cards.

Q: Was the local business's resale to the public taxable?

A: No. That sale also was not subject to sales tax.

Q: When did sales tax apply?

A: When a customer used the bills to purchase taxable merchandise or services.

Q: How was the tax measured if the customer paid with community currency?

A: The business had to calculate and remit the tax in U.S. dollars.

Q: Were the bills exempt legal tender?

A: No. The Commission said the legal-tender and precious-metal exemptions did not apply.

Q: Did the printer owe tax on paper and production materials?

A: Yes. The printer owed sales or use tax on the materials used to make the bills.

Key source language

• Classification: “both the initial issuance of the currency bills from you to the local businesses and the subsequent sales of the currency bills by the local businesses to the public are sales of intangible property similar to gift cards.”
• Underlying purchase: “the participating businesses must collect and remit sales tax when customers use the bills to pay for taxable merchandise or services.”
• Printer's materials: “you as the printer must pay sales or use tax on the materials used to produce the currency bills.”

Citations and references

• Utah Code Ann. § 59-12-104(51), (52)(b)
• Black's Law Dictionary 726 (5th ed. 1979) (definition quoted in the ruling)

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 09-006

Original ruling text

FINAL PRIVATE LETTER RULING

REQUEST LETTER

09-006

February 20, 2009

Tax Master

I am considering a business venture where I would print and issue a community currency. It is 100% legal to print and issue community currencies provided that they do not look anything like US Dollars. They circulate in a limited geographical area such as a county. They are a form of paper money that businesses may accept as full or partial payment for goods or services.

To issue the community currency I would print the community currency bills and then sell them to local businesses for a percentage of their face value. The local business would then resell them to the public at face value.

Once the community currency is in circulation it would be exchanged and used to pay for goods and services just like regular US dollars are used.

My question is in regard to the initial issuance “sale?” of the currency to local businesses and the “re-sale?” of the currency to the public. Would either of these transactions be considered a taxable sale for sales tax purposes?

The community currency is a physical thing, however, it is not a consumer item. It is used as money in the community.

While community currencies have been used in other States for many years, I don’t know if this question has been addressed in Utah.

In the Utah Sales Tax Code there is an exemption for legal tender in 59-12-104 (51) and in (52) (b) there is an exemption for other things that do not constitute legal tender such as gold, silver, and platinum.

(51) sales of currency or coinage that constitute legal tender of the United States or of a foreign nation.
(52) (a) sales of an item described in Subsection (52)(b) if the item:
(i) does not constitute legal tender of any nation; and (ii) has a gold, silver, or platinum content of 80% or more; and (b) Subsection (52)(a) applies to a gold, silver, or platinum:
(i) ingot;
(ii) bar;
(iii) medallion; or
(iv) decorative coin;

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I do not know if there is anything else in current sales tax law that might apply to a community currency. Please advise.

I would very much appreciate your research and response.

Thank you,

NAME

COMPANY
ADDRESS
EMAIL
PHONE

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RESPONSE LETTER

September 10, 2009

NAME
COMPANY
ADDRESS

Re: Sales Tax Treatment on Sales of Community Currency Based on Facts as Provided

Dear NAME:

You have requested a ruling on the sales tax treatment of transactions involving a community currency that you propose to print and issue. You provided us with the facts through your request letter and our later telephone conversation. You explained that the local participating businesses would accept the currency as full or partial payment for goods or services.

You plan to issue the currency by printing currency bills and then selling them to local businesses for a percentage of their face value, possibility 60 percent of face. You would print the currency bills using a laser printer, spotlighting the purchasing businesses on the front of the bill and referring to other participating businesses on the back. You then explain that the local businesses would resell the bills to the public at face value. You further explained that the local business would want to purchase the bills from you, first, for advertising because they would be featured on the bills that they purchase and, second, for profit because the businesses would earn a profit by selling the bills to the public. You explained that the public would want to purchase the bills at face value in an effort to support local businesses. An individual might purchase the currency bills to give as a gift to someone else, like a gift card. You assert that once the bills are in circulation, the bills would be exchanged and used to pay for goods and services just like regular U.S. dollars are. When asked about how businesses might redeem the currency bills for U.S. dollars, you explained that no organization would be designated to redeem. However, local businesses could resell the currency back to the public.

You have asked us to rule on the sales tax treatment of your initial issuance of the bills to the local businesses and on the treatment of the local businesses’ subsequent sales of the bills to the public. You have also asked us to advise you if there is anything other than §§ 59-12-104 (51) and (52)(b) that might apply to a community currency.

For this ruling, we have considered information about community currencies, in general.
Such currencies depend on a network of local banks, businesses, and individuals. The main purpose of the community currencies is to promote “buy local” movements. Local banks are typically are involved to exchange U.S. dollars for the community currency and the community currency for U.S. dollars. A group of local businesses agree to accept the community currency for services or goods. In this case, a couple key differences between your currency bills and

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other community currencies are that there will not be an organization to redeem the currency for U.S. dollars and that your currency will spotlight different local businesses on the front based on the businesses that purchase the bills from you.

After considering the facts presented, we find that both the initial issuance of the currency bills from you to the local businesses and the subsequent sales of the currency bills by the local businesses to the public are sales of intangible property similar to gift cards. The physical cards do not have intrinsic value; rather, the cards represent other value. Black’s Law Dictionary defines “intangible property” as follows: “this term means such property as has no intrinsic and marketable value, but is merely the representative or evidence of value, such as certificates of stock, bonds, promissory notes, and franchises.” Black’s Law Dictionary 726 (5th ed. 1979). A gift card is not taxable when a company sells it to a customer. Instead, the company collects sales tax when a customer uses it to purchase taxable services or merchandise.

Accordingly, we find that the sales of the bills, whether at the initial purchase by a business or at a subsequent sale by the business to the public, are not subject to sales tax, even if the businesses are featured on the bills. Rather, the participating businesses must collect and remit sales tax when customers use the bills to pay for taxable merchandise or services. The tax collected must be calculated and remitted to the Tax Commission based on U.S. dollars even if customers pay with currency bills.

We have two final related items to discuss. First, although the sales of gift cards are not taxable, the materials used to produce the gift card are subject to use tax. Similarly, you as the printer must pay sales or use tax on the materials used to produce the currency bills.

Second, we find that the currency bills do not meet the exemptions of §§ 59-12-104 (51) and (52)(b) for legal tender or for the sales of gold, silver, or platinum.

In conclusion, based on the facts presented and the reasons stated above, both the initial sale and the subsequent sale of the currency bills are transactions not subject to sales tax. Rather, sales tax applies to the later transactions in which customers pay for taxable merchandise or services with the bills. Additionally, you as the printer must pay sales or use tax on the materials used to produce the bills.

Our conclusions are based on the facts as described. Should the facts be different, a different conclusion may be warranted. If you feel we have misunderstood the facts as you have presented them, if you have additional facts that may be relevant, or if you have any other questions, please contact us.

For the Commission,

Marc B. Johnson
Commissioner

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MBJ/aln
09-006

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